Should you refinance your mortgage?
Reasons why you should (or shouldn’t) refinance your home
Many homeowners ask "Should I refinance my mortgage?" when interest rates are low. The answer depends on many factors including the interest rate on your current mortgage, how long you plan to live in your home, how many years you have left on your loan, your personal credit and finances, and more.
Check out our list of refinancing questions below. Answering these questions can help you decide if you should refinance your home’s mortgage. By refinancing, the total finance charges may be higher over the life of the loan.
Are today’s rates low compared to your current rate?
When you are refinancing, what matters is not whether today’s rates are low compared to rates in the past. What matters is whether current rates are lower than the rate you have on your mortgage right now. And today’s rates should be low enough to make paying the closing costs of refinancing a good idea.
Different financial advisors have different rules of thumb for how much lower rates should be before you think about refinancing. We recommend using our home refinance calculator to help you decide. Our calculator will show you how changing your interest rate and other mortgage terms might affect your monthly payments and how much you might save in interest over the life of the loan.
How long do you plan to keep your home?
Refinancing often doesn’t make sense if you are planning to sell your home soon. That’s because when you refinance, you pay the closing costs of refinancing upfront, either in cash or by adding them to your loan amount.
By contrast, you enjoy the benefits of refinancing over time and it usually takes a while to "break even" on your closing costs. For example, if you save $100 a month by refinancing and pay $1,200 in closing costs, it will take you twelve months to break even and begin saving money.
How many years are left on your mortgage?
The remaining term on your current mortgage is another important factor. If you have many years left to pay on your mortgage, then refinancing your home may make financial sense. If you are closer to paying off your mortgage, then refinancing might not make sense. That’s because mortgages are usually structured so you pay most of the interest before you pay back the principal. This means in the early years of a mortgage, a lot of your monthly payment goes to interest. In the later years, a lot goes to principal. You might not save much money by refinancing in this case, especially if you have to pay closing costs.
Another reason not to refinance a mortgage you are close to paying off is because you might have to extend the loan term. This can happen when you change lenders. Many lenders don’t want to offer mortgages with short terms. For example, the shortest mortgage some lenders might be willing to offer could be 15 years. If you have less than 15 years left to pay on your current mortgage, refinancing might cost you more money in interest over the life of the loan because you are paying back your mortgage over a longer period of time.
If you are a current Freedom Mortgage customer, we can often help you refinance while keeping your loan term the same when you refinance with us. Call to ask what we can do for you.
Are you paying mortgage insurance?
When you have a conventional loan, you might be able to stop paying for private mortgage insurance (PMI) when you refinance. You need to have at least 20% equity in your home to do this. Note that it is not necessary to refinance a conventional loan to get rid of private mortgage insurance. You can also request your lender remove PMI from your mortgage when you meet the requirements.
The rules are different for the mortgage insurance premiums (MIP) that come with FHA loans. If you bought your home with an FHA loan, then you might have to refinance into a different kind of loan to get rid of MIP payments. Learn more about ways you can stop paying mortgage insurance.
Do you have good credit?
When you have good credit, it can increase the chances a lender will approve your refinance application. A good credit score can also help you get a better interest rate. When you have a high credit score, you might be offered a lower rate compared to rates you see advertised. When you have a low credit score, you might be offered a higher rate than those you see advertised by lenders.
Should you refinance a VA loan?
The questions to ask before you refinance a VA loan are similar to the questions you should ask before refinancing other mortgages. There are a couple differences to keep in mind. If you qualify for a VA streamline refinance (also known as a "VA IRRRL") your closing costs can be lower compared to the costs of refinancing other mortgages. VA streamline refinances have less paperwork and more flexible credit requirements. And you don’t have to pay for mortgage insurance with VA refinances although you will likely have to pay a funding fee.
Should you refinance an FHA loan?
FHA loans also have a streamline program which can help you refinance when it makes sense for you. FHA streamline refinances have less paperwork and more flexible credit terms compared to refinancing with a conventional loan. You will have to pay new mortgage insurance premiums however. These include an upfront premium you need to pay at closing or add to your loan amount as well as monthly premiums that you will pay as part of your mortgage payment.
Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions.
Last reviewed and updated February 2023 by Freedom Mortgage Corporation